It turns out what happens on Wall Street is a kitchen-table economic issue.
"’If we’re really looking at another Great Depression,’ I said, ‘you can be damn sure I’m going to be Roosevelt, not Hoover.’"
Those were the words of president Barack H. Obama, before he bailed out an insurance giant with taxpayers’ hard-earned dollars, guaranteed trillions of dollars of money market funds with taxpayers’ hard-earned dollars, launched a program to keep liquidity in the commercial paper market, and imposed a draconian rule that no one could short financial stocks—a serious intervention into the market and an egregious violation of free market principles. Actually, that’s not true. Those were the words of president George W. Bush (Decision Points p. 440) before he, in his own words, approved the following plan:
First, the Treasury would guarantee all $3.5 trillion in money market mutual funds, which were facing depositor runs. Second, the Fed would launch a program to unfreeze the market for commercial paper, a key source of financing for businesses across the country. Third, the Securities and Exchange Commission would issue a rule temporarily preventing the short-selling of financial stocks. (p. 439-40)
Of course that was not George Bush’s plan. That was Government Sachs’ Hank Paulson’s plan which W. was forced to reluctantly approve because, as Hank put it, "America’s financial system is at stake." Hank’s investment bank was definitely at stake.
To be fair, W. was talking about being the Rough Rider, Teddy Roosevelt. But the plan sounded a lot more like something that would come from that other Roosevelt—the champion of government intervention and according to contemporary conservatives the Prince of Darkness.
But let’s back up a little bit. How did all of this happen? The wide-eyed Texas lad named W. came into office with a very simple domestic economic agenda. Here I’ll let him tell you.
The centerpiece of my plan was an across-the-board tax cut. I believed government was taking too much of people’s money. By the end of 1999, taxes accounted for a higher percentage of GDP than they had at any point since World War II. The government was supposedly running a large surplus. I knew where that money would go: Government would find a way to spend it. After all, Congress and President Clinton had agreed to increase nonsecurity discretionary spending by more than 16 percent in fiscal year 2001. (p. 442)
The problem according to W. was that the greedy government had a big ole surplus, so he sought to change that. And he did, in eight short years he turned a massive government surplus into an even more massive government debt and thereby prevented the government, in case it fell into the hands of a liberal do-gooder, from being able to spend much on anything. But that’s not all there was to the story, no sir.
I had another reason for supporting tax cuts. I worried that we could be witnessing another bubble, this one in the technology sector. Larry Lindsey, my top economic adviser, believed the country was headed for a recession. If he was right, the tax cuts would act as a vital stimulus. (Ibid.)
So the difference between Republicans and Democrats is that Republicans want to stimulate the economy with tax cuts rather than with fiscal outlays. But both measures presuppose that government should intervene in markets. Armed with that enthymeme, whether he acknowledges it or not, W. got to work and "In June 2001, I signed a $1.35 trillion tax cut, the largest since the one Ronald Reagan signed during his first term." Good for him.
Veering a bit off course here, this is a point where Bush says something very interesting. W. says, "The bill reduced marginal tax rates for every income taxpayer, including millions of small business owners..." And at this point he adds a footnote, "Many small business owners are sole proprietorships, limited partnerships, or Subchapter S Corporations, meaning they pay their business taxes at the individual income tax rates." This rare footnote from Bush is fascinating because here he acknowledges the fact that individual income tax rates are more important for small businesses that the business tax rate. Remember that if you here Republicans complain about policy proposals to lower the highest bracket individual tax rates to a point below the business tax rate. They will try to argue that such measures are bad for business and will act as a counter-stimulus because they shift money from business accounts to individual accounts. Do not allow conservatives to conflate the interests of big business and small business.
Moving right along, "The bill also phased out the death tax, a burden that was unfair to small business owners, farmers, and ranchers. I figured Americans had paid enough taxes while they were living; they shouldn’t be taxed again when they died" (p. 443). What a cute, folksy way of rationalizing eliminating a tax that only directly affects less than 1% of the population. That may be the key to Bush’s success, he is an elitist who makes policy for the richest and most powerful, putting him on the better side of Caesar, but he justifies it in a folksy, down-home way that appeals to the common man.
When the problem affects middle class or working class Americans, W. believes in free market principles. But when the problem affects the wealthy or enfranchised, W. channels his inner FDR to spring government into action. That is the perhaps the reason Republicans are so successful electorally, independent of the actual performance of the institutions they run. They are almost always acting as advocates for an established constituency.
Bush argues that the Bush tax cuts (BTCs) were progressive and that the "top 1 percent went from paying 38.4 percent of overall taxes to 39.1 percent, while the bottom 50 percent saw their share decrease from 3.4 percent to 3.1 percent" (p. 445). It would be bad form to dismiss this argument outright. Higher tax rates are not necessarily going to increase revenues, and there exists in theory a revenue-maximizing tax rate which, at any given point in time, could be lower than the present tax rates. The obvious corollary is that sometimes lowering tax rates can increase revenues, and perhaps the rich ended up paying a slightly larger share of the pie after the Bush tax cuts. But the fact still remains that the BTCs caused erosion in the projected surplus, which Bush admitted was his intent.
It was not Bush’s fault that the tragic events of 9/11 occurred. Those events drove the country deeper into recession. A recession Bush may have inherited. Also, Bush’s response to the economic effects of the terror attacks was not as fatuous as his critics suggested, which he successfully argues in the book.
However, the policy illustrates the irresponsibility of conservatives’ obsession with pushing down tax rates. The point in a surplus is not government confiscation in pursuit of a socialist agenda. The point in running a surplus is to be prepared for unexpected economic events that may depress the economy. This gives government some leverage to act, the same way that keeping the Fed’s balance sheet smaller gives the Fed more leverage to act (a point I expect most conservatives to agree with). Bush’s rush to reward his essential constituency put the American government in a disadvantaged position to act in response to the economic subversion of bin Laden’s foot soldiers.
To be fair, W. would argue with this point as well. He believes the tax cuts were responsible for the frenetic recovery. President Bush oversaw a period of great prosperity in America, a prosperity that in retrospect seemed destined for catastrophic collapse. I said "catastrophic collapse" to contrast the current economic crisis with the normal behavior of the business cycle, which few economists would argue explains the downturn—at least in full. I do not think any normal person would regard themselves as successful for potentially causing, by policy, a robust recovery that turned out to be disastrously unsustainable. But W. is not like most of us.
Bush has a counter-argument that he was a responsible fiscal steward and has some metrics to prove it.
The average deficit-to-GDP ratio during my administration was 2.0 percent, below the fifty year average of 3.0 percent. My administration’s ratios of spending-to-GDP, taxes-to-GDP, deficit-to-GDP, and debt-to-GDP are all lower than the averages of the past three decades—and, in most cases, below the averages of my recent predecessors.
Bush went to HBS and like most businessmen he uses period-over-period benchmarks as metrics to keep score. These sorts of figures can move markets and are quite useful when comparing apples to apples. But America’s GDP during his presidency was, despite weak fundamentals, inflated by the financialization of the economy supported by a Republican Congress’ repeal of Glass-Steagall, which was signed into law by Clinton and which Bush implicates as part of the cause of the financial crisis but which Bush did little to address when he was president. After all, regulation is bad—that’s part of his ideology—and an illustration of why having committed ideologues at the reins of power can be dangerous. Furthermore, even if we accept as truth that Bush ran an average deficit-to-GDP ratio during his terms that was 1 percent less than the fifty year average Bush may look like a best in class and if we were buying shares in him that would be enough to justify the purchase but it still was not enough to ward off disaster. He had not done enough. The ball was stilled dropped on his watch and he should not be allowed to pass the buck. Remember where the buck stops.
Now for the main event: just like Greenspan in his book, Bush attributes the proximate origins of the financial crisis to what Bernanke called a "global savings glut," especially in East Asia. The great sea of global liquidity which led to irresponsible speculation in housing finance markets notably enabled by a weak regulatory framework—a fact which is fairly uncontroversial on both sides of the political divide; so much for blaming an activist government. W. admits he, like most others, did not see that the financial house of cards was built on a foundation of irrational expectations of continued domestic housing market inflation until it was too late.
It’s funny how things seem to come full circle, "I began my final year in office the same way I had started my first, concerned about a bursting bubble and pushing for tax relief" (p. 452). That’s how the great game works in capitalism. A bubble is blown by insightful analysts who find an asset class that just can be missed, and when it comes time for the bubble to burst either 1) liberals try to ward off disaster by fiscal stimulus and monetary easing or 2) conservatives try to ward off disaster with tax cuts and monetary easing. You would figure this game would be getting old. Bush admits he responded inadequately with the tax rebates.
The following is a real gem:
I was surprised by the sudden crisis. My focus had been kitchen-table economic issues like jobs and inflation. I assumed any major credit troubles would have been flagged by the regulators or rating agencies. After all, I had strengthened financial regulation by signing the Sarbanes-Oxley Act in response to the Enron accounting fraud and other corporate scandals. (p. 453)
Most conservatives I’ve heard discuss the matter say they do not trust a government’s ability to competently regulate anything except domestic criminality and foreign threats for some reason. For him to assert that he expected problems to be "flagged by the regulators" in perhaps the most complex area of regulation, well, it doesn’t even pass the laugh test. Furthermore, Sarbanes-Oxley does not rebuild the firewall between commercial and investment banking that the repeal of Glass-Steagall tore down. S-O is about reporting standards, mostly.
W., under the advice of Hank, started the bailouts because he was more "worried about a financial collapse" than "about creating a moral hazard" (Ibid.). Then Fannie Mae and Freddie Mac were taken into government conservatorship, a successful measure as evidenced by what it did for the investor class, "the Dow Jones increased 289 points on Monday" (p. 455).
The Lehman episode was more instructive of the way things work. "Hank and Tim Geithner devised a way to structure a deal without committing taxpayer dollars. They convinced major Wall Street CEOs to contribute to a fund that would absorb Lehman’s toxic assets" (p. 456). But the Wall Street CEOs would have none of it. They weren’t going to use their own money to save insolvent financial institutions (and remember the party line in America is that a collapse of a single large financial institution could have serious repercussions for the global economy). It is the sacred responsibility of the public exchequer to subsidize the ownership of troubled assets by large financial institutions. The precedent had already been set by the Bear Sterns bailout. The rich get to keep their money, no matter how ill-gotten are their gains.
The government had let the free market work and had let Lehman fail. The investor class sent a message and the "Dow Jones plunged more than five hundred points" (p. 457). The stygian gates were opened and the hounds of hell were let loose. The financiers will get their way or they will instill panic. The government leaders had been put in their place and they would not make the same mistake again.
The New York Fed would lend AIG $85 billion secured by AIG’s stable and valuable insurance subsidiaries. In return, the government would receive a warrant for 79.9 percent of AIG’s shares. There was nothing appealing about the deal. It was basically a nationalization of America’s largest insurance company. (p. 458)
Yep, no private sector solution here. The U.S. government is the only entity with the resources to be counter-party to such a transaction. So there is a reason why the government gets to keep some of its resources, so it can save the elite investor class from the traps they laid for themselves with their own damn incompetence. Bush basically admits that he was responding to signals from the financial markets. Now you know who’s really in charge. The rich got one New Deal after another. Bush was the new Roosevelt, Franklin. No need to go on. The rest is history. Tragic history.